The EU is fortifying itself with remarkable speed for a new era of 'zero gas' from Russia
A Western oil embargo against Russia raises the geostrategic stakes exponentially.
What was unthinkable last week looks unstoppable this week. Ukrainian resistance and outraged moral opinion in the democracies has changed what the West is prepared to do.
The White House is sending emergency missions to Saudi Arabia and Venezuela to find extra barrels. The US is pushing for a quick deal with Tehran on nuclear proliferation to bring back Iranian crude. All normal diplomatic reservations are being set aside.
It is this - as much as comments by top US diplomat Anthony Blinken - that tells us Washington is deadly serious. A once-slumbering superpower is putting on its war paint.
The West has the strategic depth to endure the sudden loss of around 5m barrels a day (b/d) of Russian crude, the lion's share sold to Europe and Nato democracies. It will be painful but is technically and economically doable.
Berlin is for now resisting, with Europe mostly tucking in behind, but this position is likely to prove untenable as the atrocities continue.
Putin’s regime is playing on this reluctance, issuing Gothic warnings of $300 oil. It is threatening to cut off Europe’s gas for good measure. But this weapon has lost its potency after weeks of mild weather and copious deliveries of US liquefied natural gas.
European gas storage was indeed dangerously-low in December after months of manipulated flows from Gazprom. Today it is back within historical ranges. Frans Timmermans, head of the EU’s energy transition, says Europe currently has enough gas to muddle through this spring whatever happens.
We have an odd situation where both sides are threatening to play the energy card, but the threats are not in reality equivalent. A crude blockade will make it impossible for Putin to continue waging serious offensive war in Ukraine beyond a few weeks. Oil and gas make up 40pc of Russia’s state budget. It is what holds the patronage machine together.
There is a reasonable chance that an embargo will set off the internal disintegration of Vladimir Putin’s siloviki regime (KGB mafia), though by what mechanism remains obscure.
Professor Alan Riley from the Atlantic Council said the combination of central bank sanctions, ejection from the SWIFT payments system, and an energy embargo could crystallise matters very quickly. “We may reach the point where Putin can’t even pay his troops,” he said.
Talk of an oil embargo sent Brent futures to almost $140 on Monday, smashing records in euros, sterling, and most other currencies. Prices have settled back a little on European hesitancy but could explode at any moment. JP Morgan has pencilled in $185 in a sustained stand-off. Bank of America says the industry’s rule of thumb is that each “unexpected” loss of 1m b/d lifts prices by $20. A total Russian cut-off of 5m b/d would therefore lift prices to around $200.
Oil hedge fund Westbeck Capital says the spike could be even greater, given years of structural underinvestment in new oil projects and the fast pace of crude inventory depletion over recent months. Demand destruction will occur in earnest at around $150-175, but first there is likely to be an overshoot blowing well over $200.
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Anti-Putin graffiti in Vienna this week CREDIT: GEORG HOCHMUTH/ AFP